GMAC Reaches $6M Force-Placed Insurance Class Action Settlement

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Lender-placed insurance, also known as force-placed insurance, is a home insurance policy placed by a lender or bank to protect its financial interest in the event that the hazard insurance policy is cancelled, has lapsed, or is considered insufficient.

As the banks have an ownership interest in the property, the practice of force-placed insurance is not unlawful. However, the marketplace for that type of insurance has been rife with corruption and homeowners have ended up with far higher payments on their forced-placed insurance policies.

In April, Pennsylvania federal judge Paul Diamond was asked to approve a $6.25 million settlement agreement to end a force-placed insurance class action lawsuit against GMAC Mortgage LLC. According to court records, about 66,000 reinsured loans are covered under the class. Plaintiffs can include anyone who obtained a residential mortgage loan through GMAC with private mortgage insurance provided by CapRe of Vermont Inc.

The GMAC force-placed lawsuit originated in California in December 2006, (the case later moved to Pennsylvania), when plaintiffs filed against GMAC, accusing them of violating the Real Estate Settlement Procedures Act (RESPA). The GMAC lawsuit alleges GMAC participated in a kickback scheme, paying mortgage reinsurers with money drawn from the mortgage premiums.

GMAC allegedly paid illegal referral fees to reinsurers that homeowners were mandated to purchase policies from. The force-placed insurance lawsuit states, “because the fees that GMAC paid the reinsurer far exceeded the actual value of its services, those fees were simply a way to disguise illegal kickbacks, essentially meaning that homeowners paid for their own insurance and GMAC’s reinsurance kickbacks.”

For nearly 10 months in 2011 and 2012, the GMAC force-placed lawsuit was stayed while the U.S. Supreme Court agreed to hear arguments in a similar suit over standing issues. GMAC had argued that “the plaintiffs could not show that they or any putative class members had been overcharged for the mortgage insurance at issue.”

GMAC argued in vain. Court records show that in June 2012 the justices issued a one-sentence order cancelling the pending appeal, stating it was “improvidently granted.”

After “six years of hotly contested litigation challenging defendants’ captive reinsurance arrangements involving novel claims and highly complex legal arguments,” the two sides announced the force-placed class action settlement deal in January. The court was asked to refrain from issuing a ruling until the parties were able to execute an escrow agreement and draft updated versions of the proposed class notice. In April plaintiffs Donna Moore and Frenchola Holden did just that, entering into an escrow agreement.

The GMAC Force-Placed Insurance Class Action Lawsuit is Donna Moore and Frenchola Holden, et al. v. GMAC Mortgage, et al., Case No: 2:07-cv-04296-PD, in the U.S. District Court of the Eastern District of Pennsylvania.